SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK (Internal Audit)

OBJECTIVE O B JE C TI V E C A TE G O R Y R IS K R E FE R E N C E

POTENTIAL RISK SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL RISK _{(Internal Audit)} MANAGEMENT CONTROL or COMMENTS (if Risk is _{excluded from the Scope)} CONTROL OWNER _(Name)

MILL RAW MATERIALS

Receiving of Raw Materials

they have valid Purchase Orders. (validity) INV101Raw materials are received and accepted on invalid Purchase Orders or without Purchase Orders. The

following may be received and ultimately paid for, rather than returned or refused: unordered raw materials, excessive quantities, incorrect items, cancelled or duplicated deliveries. Raw materials that arrive too early or too late may be accepted. Company policy is not followed regarding the handling of receipts for which no Purchase Order can be located on SAP.

The requirement exists that a goods receipt must reference a Purchase or Production Order so there is certainty the goods received were ordered. All goods received are based on a valid Purchase Order (PO) number. Purchase Order is stated on delivery documents and is verified for validity.

Raw materials are checked for quantity and quality before being accepted.

INV102Raw materials received are not subject to an inspection for quality / quantity. Criteria are not clearly established for inspecting received goods and services. No policy is established for inspecting receipts in proportion to their importance and value. Only the vendor's delivery note (and not the physical goods) is matched to the Purchase Order. Inspection results are not recorded to be available for the vendor evaluation process. Vendors do not deliver the expected quantity or materials. Goods receipt discrepancies are not addressed. Company policy regarding the handling of under/over deliveries is not followed. Tolerances for under/over deliveries are set to inappropriate values. Raw materials are accepted without authorised documentation (e.g. COAs - Certificate Of Analysis).

Goods counted and inspected before acceptance: overshipments and unacceptable items are returned to the vendor. Materials are checked for quantity and quality: Quantities of material received are verified by actual count, weight, or measurement by the receiving department. Quality inspection evidenced by inspection reports, notations, receiving reports, or other acceptable records. Variances in quantity ordered versus quantity shipped are reported. Quantities less than those indicated on the Purchase Order may be accepted; however, quantities more than those indicated on the Purchase Order should be approved by the requisitioning department and the buyer.

Returns of raw materials to suppliers are properly

handled. INV103Damaged or low quality goods received are not properly identified and handled. Defective raw materials are not

returned to the supplier and are accepted into stock. Accounts payable is not notified of goods returned to vendor, and the invoice is paid. Return deliveries are not entered promptly into the system in order to reverse the goods receipt updates. No process is established to ensure the vendor issues credit memos when appropriate.

Defective raw materials received from suppliers are logged. The log is monitored to ensure that the defective goods are returned promptly and that the credit (AP) is received timely. Rejected raw materials are adequately segregated from other raw materials and are not used. Rejected raw materials are regularly monitored to ensure timely return to suppliers. A security check to either an authorised return form or a delivery note is performed on all goods leaving the premises.

Only raw materials received are recorded. (validity) INV104Fictitious receipts of raw materials may be recorded. Invalid materials may be recorded. Payments may be made for fictitious goods.

SAP edits and validates input GRN data on-line. The values that are allowed, for example, for a material master, are known to the system. Upon entry in the field SAP automatically checks the value entered against the values available in the configuration tables. Most goods receipts are created with reference to a Purchase Order.

Raw materials received are recorded accurately. (accuracy)

INV105Raw materials receipts are not recorded accurately. Incorrect goods receipt information is entered.

Capturing of receipts directly into SAP: Mandatory fields, Tolerance levels, Visual checks by operator, e.g. key in material number and description appears on the screen, Limit/reasonableness checks on quantities (e.g. no negative amounts). SAP edits and validates input Goods received note (GRN) data on-line. Most goods receipts are created with reference to a Purchase Order. SAP then copies information from Purchase Order into GRNs per configuration. The SAP material movement automatically creates both a material (for quantity) and accounting (for value) document. The transactions update these items: Purchase Order history, stock overview, Material Requirements Planning (MRP) (planning file), general ledger accounts.

Raw materials received are allocated correctly. (classification)

INV106Goods receipts do not have the correct account assignments.

Account assignment is determined at the time of purchase authorisation (PR / PO).

All raw materials received are recorded. (completeness)

INV107All raw materials are not recorded when received. Inventory received is not recorded at all. Goods movements are not captured on SAP (i.e. receipt of raw materials).

All deliveries must be directed through Stores Receiving. Appropriate stores procedures should be implemented to ensure all raw materials receipts are recorded. Vendor statement reconciliation including follow-up of invoices without GRNs.

Receipts of raw materials are recorded timeously

and in the correct period. (proper period) INV108All raw materials received are not recorded in the period in which they have been received. Goods receipts are

not entered immediately into the system, particularly on period-end dates.

Documentation in respect of goods received at, before, or after the end of an accounting period is scrutinised and/or reconciled to ensure complete and consistent recording in the appropriate period.

Received raw materials are safeguarded. INV109Raw materials are received by unauthorised personnel.

Received goods are not physically secured to protect them from theft. Personnel are not required to acknowledge receipt of goods.

Goods are delivered only to designated, physically secure locations within a warehouse or storage building and are accepted only by authorised personnel (stores personnel).

Raw materials are delivered to the correct location. INV110Raw materials are delivered to the incorrect location. Purchase Order forms are pre-printed with the receiving location and

that instruct vendors only to deliver to that location. Security accompanies vendors which deliver toxic, chemicals and other environmentally sensitive material to the correct location.

Expected and overdue orders for raw materials are monitored.

INV111No monitoring of expected or overdue goods receipts. Vendors do not deliver on time. No action is taken for late deliveries.

Expedition of Purchase Orders is covered under the Expenditure cycle.

See weighbridge for relevant controls and risks over incoming product.

Transfers (issues) of Raw Materials to Production

on the basis of authorised documents. (authorisation)

INV201Goods movements in SAP (inventory transfers, transfer postings) are not authorised. Unauthorised issues may be recorded. Incorrect quantities of raw materials may be transferred to production. Raw materials not requested transferred to production.

Appropriate documentation is completed when goods are issued: Written stores requisition is required for all raw materials issues. Materials are only transferred on the basis of a properly approved source document. Transfer documentation should accompany all transfers, stores or other activities and personnel should verify material and quantity received. Requesting department should sign approval on stores requisitions as acknowledgement of receipt.

All issues of raw materials to production are

accounted for. (completeness)

INV202Issues from raw materials inventory may not be recorded. Transfer documents may be lost. Goods movements are not captured in SAP.

Prenumber transfer documents (e.g. stores requisitions) should exist. The sequence of these documents is independently checked. Missing documents should be investigated.

All material is issued in a timely manner. INV203Late raw materials issues may resulting in loss of

production time.

A procedure should be established that the material is issued to an order (transfer, work, etc.) within an established time period after the inventory has been picked. By issuing the material to the order immediately after the pick has been completed, the inventory levels are kept current and the possibility of the wrong material being issued to an order is minimized.

Issues from raw materials inventory are correctly

recorded as to quantity and amount. (accuracy).

Issues from raw materials inventory are processed in the correct accounting period to the correct

account. (classification and proper period)

INV204Transfers (issues) of raw materials to production may not be accurately recorded. Raw materials issues may be processed in the incorrect period or to the incorrect account. Raw materials may be allocated to the incorrect cost centre. Transfer procedures do not require preparation of supporting documentation.

Transfers of raw materials are documented. Transfers (issues) from raw materials to production are only done on the basis of a source document. A procedure should be established whereby the source documents are captured in SAP within an established time period after the inventory has been issued. By recording the issue in SAP immediately after the issue has been completed, the inventory levels in SAP are kept current and the possibility errors are reduced. Physical inventory is counted periodically. Inventory counts are reconciled to inventory records and a theoretical usage is derived. Monthly consumption figures are reviewed by Management. Variances against standard are identified and investigated.

All materials requisitioned represent valid items and quantities used in the production of pulp or

paper at the mill. (validity)

INV205Raw materials could be used for unauthorised purposes. Incorrect raw materials are used.

Validations prevent the entry of incorrect information (e.g. nonexistent storage locations or materials). SAP has standard reports for goods issued and goods received, these report are reviewed regularly.

Transfers between units/mills are recorded accurately and timeously.

INV206Transfers between units/mills are not recorded. Require appropriate documentation of materials transferred from Raw Materials Stores to other business activities.

See weighbridge for risks relevant to other mass measurement devices for issues to production.

Storage of Raw Materials

INV301Raw materials inventory is unusable. Chemicals are not stored in a dry, safe place and separate from other raw materials. Other raw materials are not usable due to bad storage.

Develop strategy/policy for storing materials to include (1) the number and type of storage locations to be used, (2) Warehouse placement of materials (3) OSHAct requirements for the proper labelling/storage of hazardous materials (4) Storage capacity levels (5) Physical inventory requirements. A shelf life strategy is developed and authorised to include any materials that would have specified timeframe for usage. Physical storage methods regularly reviewed for sources of inventory deterioration.

Raw materials inventory is adequately safeguarded. There are special safeguards for expensive material and material susceptible to personal use or sale.

INV302Unauthorised access to raw materials inventory -

misappropriation of raw materials inventory. Storage areas secured against unauthorised admission. Periodic stock counts should be regularly performed. Storage areas secured

against unauthorised admission.

All warehouse and inventory locations comply with appropriate government, regulatory, and company policies.

INV303Non-compliance with statute and / or company policy e.g. with regard to safety, notices. Fines / Loss of ratings (e.g. NOSA).

Management reviews all physical inventory storage locations for compliance with government, regulatory, and company policies.

Hazardous materials are stored and handled in an appropriate manner in accordance with applicable government regulations.

INV304Hazardous materials are not stored, handled and transported in compliance with applicable laws and regulations. Fines / Loss of ratings (e.g. NOSA).

The item master record should contain a field to identify the material as hazardous. Appropriate procedures for handling and storing hazardous materials should be maintained. There should be proper follow up on reported safety concerns. Relevant policies should be maintained which are consistent with Occupational Safety and Health Administration and other pertinent laws and regulations approved at technical and legal personnel. Compliance should be monitored.

Receiving and despatch of raw materials are separate.

INV305Receiving and despatch of raw materials take place out of the same entrance. Lack of segregation of duties.

Physical storage areas for goods issued and goods received should be segregated. Different personal are responsible for receiving and/or issuing raw materials.

Raw materials inventory adjustments (including

scrapping) are valid. (validity)

INV306Adjustments to raw materials inventory prices or quantities do not relate to valid price changes and physical inventory differences. Recorded scrapped raw materials are not valid.

Detailed records maintained for any adjustments processed. The officials are authorised to make raw materials adjustments only on the basis of an authorised source document.

All raw materials inventory adjustments (including scrapping) are recorded when identified and are subsequently accounted for as having been

processed. (completeness)

INV307All adjustments to raw materials inventory are not recorded.

Inventory adjustments data is edited and validated; identified errors are corrected promptly. Maintain procedures for promptly updating inventory records.

Raw materials adjustments (including scrapping) are processed to the correct account within the

correct accounting period. (classification and

proper period)

INV308Raw materials adjustments may be processed in the incorrect period or to the incorrect account. Raw materials scrapped items are not processed timeously.

Goods received at, before, or after the end of an accounting period are scrutinised and/or reconciled to ensure complete and consistent recording in the appropriate period.

Raw materials adjustments (including scrapping)

are accurately processed. (accuracy)

INV309Adjustments to raw materials may be inaccurately recorded or incorrectly processed. Raw materials scrapped items are not processed accurately. Costs of scrapped items are not written off.

Raw material adjustments are compared to authorised source documents to ensure that they were input accurately.

Raw materials adjustments (including scrapping) are reviewed and approved by a responsible

official. (authorisation)

INV310All adjustments to raw materials inventory have not been authorised in accordance with the appropriate limit of authority. The scrapping of raw materials is not authorised.

The officials are authorised to make raw materials adjustments only on the basis of an authorised source document. Management reviews and approves all recorded adjustments to inventory prices or quantities.

Inventory valuation policy is adhered to when valuing raw materials stock. Inventory reserves are reviewed and adjusted to ensure that balances do not exceed net realisable values.

INV311Raw materials inventory does not reflect the existing business circumstances and economic conditions in accordance with the accounting policies being used. (lower of cost or Net Realisable value (NRV))

Raw Materials are valued automatically in SAP according to moving average price. At the end of each accounting period management should assess whether there is any indication that inventory may be impaired. The recoverable amount should be estimated. Application of stock valuation policy by controlling when valuing stock on a monthly basis.

Raw materials are issued on a first in first out

basis. INV312Raw materials inventory may expire - exceed the shelf life - or become obsolete. Materials are issued to production on a FIFO basis, expiry dates are monitored and there is regular turnover of the main raw materials,

limiting the risk of obsolescence.

Inventory levels are maintained in accordance with established Company Policy. Limits are placed on quantities to be maintained in inventory. The adequacy and appropriateness of inventory levels is monitored.

INV313Inadequate or inappropriate inventory levels are maintained. Unanticipated or excess inventory carrying costs may be incurred.

Management monitors the adequacy and appropriateness of inventory levels. Stock level policies are established to include replenishment cycles, safety stock levels, slow moving inventory, etc. and this plan is communicated to appropriate personnel. Stock replenishment policies are periodically reviewed, at least annually, to ensure policies meet changing company needs. The value of items in stock is maintained at the lowest practical levels in order to economise the use of working capital and to minimise the costs of storage.

Individual inventory balances per SAP are periodically compared to the physical inventory of

raw materials. (completeness, accuracy and

validity)

INV314Inventory balances may be incorrectly recorded. Correct raw materials stock count procedures are not followed (e.g. as regards cut-off.) Stock counts of raw materials are not properly recorded.

Physical inventory is counted periodically by persons independent of day-to-day custody or recording of inventory. Inventory counts are reconciled to inventory records and inventory records are reconciled to the general ledger.

Adjustments resulting from the comparison of physical to recorded inventory of raw materials are

approved by a responsible official. (authorisation)

INV315Raw materials stock count adjustments are not authorised, or are inaccurate or incomplete. Raw materials stock count differences are not investigated and corrected.

Raw material stock count adjustment data is edited and validated; identified errors are corrected promptly. Raw material stock count adjustments are compared to authorised source documents to ensure that they were input accurately.

Raw materials inventory is usable. Inventory is periodically reviewed for excess and obsolescence issues.

INV316Obsolete and slow moving raw materials items have not

been identified. The usability of raw materials is assessed regularly including a review during physical inventory counts. Inventory ageing reports are

prepared and analysed regularly.

Replacement items have been ordered (if required) for raw materials scrapped.

INV317Replacement items have not been ordered (if required) for raw materials scrapped.

System functionality monitors and maintains inventory levels in accordance with organisation policies.

Scrapped raw materials are kept separate from

other inventory. INV318Scrapped raw materials are not kept separate from other inventory. Obsolete, excess, and damaged inventories are adequately segregated from other finished goods inventories and are monitored to

ensure appropriate and timely disposition.

Sufficient inventory of raw materials is kept on hand. Stock balances are adequate to support the current rate of consumption, with regard to economy.

INV319Insufficient raw materials inventory levels resulting in loss of production time or excess inventory or inaccurate or untimely material requirement forecast.

Management monitors the adequacy and appropriateness of inventory levels or SAP functionality monitors and maintains inventory levels in accordance with organisation policies.

Raw Materials Master Data

master data file. (validity) INV401Changes to raw materials master data are not valid. A procedure is established that changes to the raw materials material master record are documented on a valid source document and

approved by owner of the material master information. All information entered during raw materials master creation and/or change is automatically validated by SAP. For example, the values that are allowed for base unit of measure, pricing group, purchase organisation and account group are known to SAP. Upon entry in the field, the system automatically checks the value entered against the values available in the configuration tables. An error message is generated if the value entered is not available.

Duplicate raw materials master records are avoided.

INV402Duplicate raw materials master data may be created. The same material is defined more than once in the masterfile but with different names. This may result in incomplete materials management reporting due to more than one material number and/or confusion when selecting material when processing Purchase Orders.

All raw material master entries must be reviewed against the existing material master before entry into SAP to ensure there are no unnecessary duplication of materials in the material master. Standard naming conventions are used to reduce the possibility of duplicate material names. The Material List (RMMVRZ00) report is generated and reviewed at least quarterly or as needed for duplicate materials. This lists materials by number, type, group, and user who created the material. Duplicate materials will be investigated and deleted from the material master record if they are not held in inventory, used in a BOM, or purchase requisition or Purchase Order.

Raw material master data changes are approved

by a responsible official. (authorisation) INV403Changes to raw materials master data are not authorised. The officials are authorised to enter, modify or delete raw material master data only on the basis of an authorised source document.

Significant changes to the raw material master file are approved by management.

Changes to raw materials master data are

accurate. (accuracy)

INV404Inaccurate raw materials data may be entered. Changes to raw materials master data may be incorrect. For example, a material may be characterised as an inappropriate material type.

The officials (responsible for maintenance of raw material master data) shall authorise all requests for modification of the material master data after having checked the contents and the accuracy of the data supplied. SAP edits and validates material master records online. Recorded changes to the material master file data are compared to authorised source documents to ensure that they were input accurately.